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Transcript of Len Yates – President and Founder OptionVue Systems International Len Yates is a professional...
Len Yates – President and Founder OptionVue Systems International
Len Yates is a professional programmer with over thirty years of experience in options software development. Since founding OptionVue he has earned worldwide recognition for his groundbreaking work in options analysis software, education and data services.
How to Trade Volatility ETFs For Big Returns: Trading the VXX/XIV
Educational materials are provided by OptionVue Systems International (OSI) for informational and educational purposes only and are not intended as trading or investment advice or a recommendation that any particular security, transaction, or investment strategy is suitable for any specific person. You are solely responsible for your investment decisions. Projections or other information regarding the likelihood of various investment outcomes are hypothetical in nature and are not guarantees of future results. Any examples used that discuss trading profits or losses may not take into account trading commissions or fees.
Options involve risk and are not suitable for all investors. In addition, electronic trading poses unique risk to investors. System response and access times may vary due to market conditions, system performance and other factors. You should thoroughly research and understand any security before investing in it.
OptionVue provides neither investment nor tax advice.
Disclaimer
Actual Trading Results
$42,000 $185,000Feb 13, 2012 Dec 23, 2013
Actual Trading Results
Up 238%, 3.38x
Volatility Products
VXX (ETN)SVXY (ETF)
Volatility Products
VXX (ETN)SVXY (ETF)
XIV (ETN)VIXY (ETF)
Inverse:
Volatility Products
VXX (ETN) +2.3%SVXY (ETF) +2.3%XIV (ETN)VIXY (ETF)
Inverse:
-2.3%-2.3%
Volatility
How is it represented?How is it measured?
Volatility
How is it represented?How is it measured?
The $VIX
Chart of $VIX
VIX
VIX Futures
Volatility Products
VIX
VIX Futures
Volatility Products
VXX
What is the VXX?
ETN (exchange traded note) representing a standard 30-day VIX futures price. VX is the symbol for the VIX futures, and the VXX is invested entirely in VX futures.
Contract Price Days Remaining
VX Jun 15.90 14
VX July 16.90 43
VX Aug 18.15 72
VX Sep 19.40 104
What is the VXX?
VXX holds proportionate amounts of the 1st and 2nd VX futures contracts. Example:
Contract Price Days Remaining Holding
VX Jun 15.90 14 50%
VX July 16.90 46 50%
VX Aug 18.15 72
VX Sep 19.40 104
Next Day
VXX must shift some of its holdings from the 1st VX futures contract into the 2nd. Example:
Contract Price Days Remaining Holding
VX Jun 15.90 13 47%
VX July 16.90 45 53%
VX Aug 18.15 71
VX Sep 19.40 103
Trading System
Proprietary indicator: $VXDIF
We use a 15 day moving average of the $VXDIF
= Price of 2nd VX future - Price of nearby FX future
Long/Short Enter Date
Enter Price
Exit Date Exit Price
Days Held
Trade Profit
Percent Cum NAV
1.00
Long VXX 1/30/09 418.32 4/13/09 401.48 73 -16.84 -4.0% 0.96
Long XIV 4/13/09 0.72 5/18/10 3.69 400 +2.97 +412.5% 4.92
Long VXX 5/18/10 116.52 5/27/10 113.32 9 -3.20 -2.7% 4.79
Long XIV 5/27/10 3.91 8/5/11 11.71 435 +7.80 +199.5% 14.34
Long VXX 8/5/11 30.31 11/23/11 48.60 110 +18.29 +60.3% 22.98
Long XIV 11/23/11 4.99 (open) 11.82 128 +6.83 +136.9% 54.45
ResultsThe result is an amazing 54.4 times your money in the 3.5 year period beginning Jan 30, 2009.
(XIV is an ETN that is a mirror image of VXX)
Lentz Volatility Indicator (LVI) is an indicator that shows whethervolatility, as measured by actual price movements in the $SPX index, is increasing or decreasing.
The LVI
Volatility increasing Volatility decreasing
Again beginning at Jan 30, 2009, the trades signaled by the refined approach were:
Results
Long/Short Enter Date
Enter Price Exit Date Exit Price
Days Held
Trade Profit
Percent Cum NAV
1.00
Long VXX 1/30/09 418.32 4/13/09 401.48 73 -16.84 -4.0% 0.96
Long XIV 4/13/09 0.72 5/4/10 4.49 386 +3.77 +523.6% 5.99
Long VXX 5/4/10 89.48 6/01/10 120.76 28 +31.28 +35.0% 8.08
Long XIV 7/13/10 4.67 8/5/11 11.71 388 +7.04 +150.7% 20.26
Long VXX 8/5/11 30.31 11/25/11 49.20 112 +18.89 +62.3% 32.88
Long XIV 11/25/11 4.91 (open) 11.82 126 +6.91 +140.7% 79.51
(A remarkable 80 times your money in 3.5 years)
Actual Results
Study period ending date
OptionVue Clients began trading
Now up 238%!
Roll YieldEach day the VXX fund must sell some of its holdings
in the nearby futures contract and buy more of the 2nd VX futures contract. This is called “rolling”. If the two contracts are at different prices, the fund will see either a gain or a loss as they roll. This gain or loss is called the Roll Yield.
Contract Price Days Remaining Holding
VX Jun 15.90 13 47%
VX July 16.90 45 53%
VX Aug 18.15 71
VX Sep 19.40 103
Term StructureThe term structure of a set of futures contracts refers
to the price relationship of the various contracts as you go out into longer duration contracts.
Contract Price Days Remaining Holding
VX Jun 15.90 13 47%
VX July 16.90 45 53%
VX Aug 18.15 71
VX Sep 19.40 103
Normal term structure
Term Structure
Contract Price Days Remaining Holding
VX Jun 41.60 13 47%
VX July 34.90 45 53%
VX Aug 29.35 71
VX Sep 27.44 103
Backward term structure
Example of a backward term structure.
Roll YieldWhen a normal term structure exists, the roll yield is
negative as the fund must buy futures at a higher price (the 2nd contracts) than the ones it is selling (the nearby).
Contract Price Days Remaining Holding
VX Jun 15.90 (selling) 13 47%
VX July 16.90 (buying) 45 53%
VX Aug 18.15 71
VX Sep 19.40 103
Normal term structure
Roll Yield
Contract Price Days Remaining Holding
VX Jun 41.60 (selling) 13 47%
VX July 34.90 (buying) 45 53%
VX Aug 29.35 71
VX Sep 27.44 103
Backward term structure
When a backward term structure exists, the roll yield is positive as the fund may sell futures at a higher price (the nearby contracts) than the ones it is buying (the 2nd month contracts).
Effect of Roll Yield
Normal Term Structure Negative Roll Yield, depressing the VXX price
Backward Term Structure Positive Roll Yield, enhancing the VXX price
Effect of Volatility Changes
Increasing Volatility VXX Rises
Decreasing Volatility VXX Falls
The Two Forces Affecting VXX Price
1. Changing Volatility Levels (Immediate, impactful)
2. Roll Yield (Subtle, slow, steady)
Warning: VXX and XIV are volatile
Proceed at your own risk!
Example, after our clients bought in at around 10.7, the XIV dipped down to 8.1 just 5 weeks later.
Still, the use of stops is not recommended.
Warning: The Daily Adjustment Factor
When volatility jumps up, and then goes back down,this hurts the inverse products such as the XIV.
All volatility products move on a daily percentage basis.Let’s say volatility goes up 3.0% one day, and the next dayreturns to its previous level. That would be a 2.91% drop.
VX Futures VXX XIV
+3% +3%-2.91% -2.91% -3% +2.91%
How aggressive do you want to be?
1. Segregate some funds for this purpose.
2. Decide how aggressive you want to be in this account, and abide by your decision.
A) Will you ever utilize all your cash? (Go all in?)
B) Will you ever go beyond that and use margin?
C) Will you ever use options? (The VXX has options)
Short the VXX or long the XIV?
Three drawbacks to shorting the VXX:
1. You must manage the position, selling more shares from time to time.
2. Right after selling more shares, the market might move against you, triggering a margin call.
3. The ultimate risk with any short position: You could lose more capital than just what is in your account.
There is a 3rd way
(During normal times in the markets)
1. Long the XIV.
2. Short the VXX.
3. ?
There is a 3rd way
(During normal times in the markets)
1. Long the XIV.
2. Short the VXX.
3. Buy deep ITM VXX puts
There is a 3rd way
(During normal times in the markets)
1. Long the XIV.
2. Short the VXX.
3. Buy deep ITM VXX puts
(much higher leverage)
(Utilizing just 1/3 of your cash, you can get the same delta as being all-in with the XIV)
What could go wrong?
If it is normal times and you are short the VXX or long the XIV, a sudden catastrophe would cause the market to move against your position, and you may need to act quickly to close your position, possibly at a loss.
XIV = VelocityShares ETN from Credit Suisse
Volatility Products
VXX = an iPath ETN from Barclays
VIXY = ProShares ETF that moves like the VXX
SVXY = ProShares ETF that moves like the XIV
XIV = VelocityShares ETN from Credit Suisse (simple tax accounting)
Volatility Products
VXX = an iPath ETN from Barclays (simple tax accounting)
VIXY = ProShares ETF that moves like the VXX (complicated tax accounting)
SVXY = ProShares ETF that moves like the XIV (complicated tax accounting
What tradable instrument is so abstract it is 8 steps removed from reality?
8 Steps Removed from reality
1. Company
2. Shares (rep. company ownership)
3. Index (aggregate many stock prices)
4. Options on index
5. VIX (aggregate IV’s of many S&P 500 index options)
6. VIX Futures
7. Volty Products (use VIX futures)
8. Options on volty products
ETN = Exchange Traded Note
Volatility Products
VXX and XIV are ETNs
Promissory Note. They promise to pay a returnto the holder that simulates the returns from actuallytrading the VX futures. In fact, they do not need totrade the VX futures and probably don’t !
Vola
tili
ty
Time
Volatility Cone
Up 80x in 3.5 yrs.(roughly 4x each yr.)
Up 3.4x in 1.8 yrs.(roughly 2x each yr.)
Actual results are off the pace
VXX Trading Tools Available in the
OptionVue Software
$VX30 30-Day forward price of the VX futures
$VXXFV, $XIVFV, $SVXYFV, and $VIXYFV Fair values of the VXX, XIV, SVXY and VIXY
$VXDIF Difference between the two nearest term VX futures
$VXXDRE, $XIVDRE, $SVXYDRE, and $VIXYDRE Daily roll effect for the VXX, XIV, SVXY and VIXY
LVI The Lentz Volatility Indicator
Articles and materials available at:
Articles on VXX Trading
www.optionvue.com/vxx.html
Thank You for Watching!
Order your VXX Trading Tools Now at the Optionvue Store
www.OptionVue.com
www.DiscoverOptions.com
1-847-816-6610